Schweitzer-Mauduit International, Inc.

NYSE:SWM

Market Cap: 1.2B / Current Price: $38.75

Abigail Malin

What does SWM do?

SWM manufactures and sells products including cigarette papers, Lower Ignition Propensity (LIP) cigarette papers, cigar papers, porous plug wrap (natural way to control airflow in ventilated cigarettes), and reconstituted tobacco leaf to the major tobacco companies in North America, South America, Europe, and Asia. They also produce nontobacco products including engineered papers, commodity papers, plastic netting and other resin based products, and filters.

What is the investment idea?

• Maintaining stable position in the mature tobacco industry in relation to worldwide sales

• Diversifying into a growth strategy company

• Concentration on filtration used in automotive, *healthcare, food, electronics, and industrial manufacturing industries

• Minor focus on diversifying paper division under the Advanced Fibers and Materials Segment through niche food and packaging industries

• Imitating other successful redesigns

What is the investment idea?

2009 2010 2011 2012 2013 2014 0

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600.0

700.0

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Segments as a Percentage of Total Revenue Over Time

Reconstituted Tobacco Paper Filtration

Revenue is stable.Composition is changing.

Maintaining stable position in the mature tobacco industry in relation to worldwide sales

• Tobacco industry is declining at a projected rate of 1.7% for next five years

• Demand remains strong:Segment Capacity

UtilizationBacklog 2014

Backlog 2013

Orders placed…

Paper*only France calculates this

81% $35 million $37 million

- US 14 days

- France 30 days

- Brazil 56 days

Reconstituted Tobacco

65% $121 million $99 million Annually

Filtration 76% $20 million $22 million 30 days

Diversifying into a growth strategy company in the filtration industry

• Acquired:

• December 2013: DelStar, Inc. – a manufacturer of plastic netting and other resin-based products focused on filtration and medical markets

• Cash: $233.7M

• $118.6M assets + $115.1M goodwill

• December 2014: Pronamic Industries, Inc. – incorporated into filtration segment

• Cash: part of 2014 acquisition spending of $32.6M

• $25M assets + $5M goodwill + cost of $2.6M

• 2015E annual net sales = $20 M

• December 2014: Smith & Nephew’s Advanced Wound Management Division – incorporated into filtration segment

• Cash: part of 2014 acquisition spending of $32.6M

• $25M assets + $5M goodwill + cost of $2.6M

• 2015E annual net sales = $16 M

• Established Advanced Fibers & Materials Segment

• Non-tobacco diversification effort

• Good for potential acquisitions and new product lines

Diversifying into a growth strategy company in the filtration industry (continued)

• Air purification equipment manufacturing is growing at a projected rate of 2.4% for the next five years

• No major players in this industry yet• Main competitors include: Leucadia National Corporation, Marshall Manufacturing Company,

Johns Manville, Hollingsworth and Vose Company

• Requirements for success: Control of distribution arrangements

Presence overseas

Connection between brand, quality, and reliability

Imitating other successful redesigns

• IBM

• Then: commercial scales, punch card tabulators, massive miniframe computers, calculators

• Now: software, consulting services, IT services

• Nokia

• Then: paper mill, rubber works, cable works

• Now: mobile phones, mobile games

• 3M

• Then: sandpaper

• Now: Scotch tape, duct tape, Post-It notes, cleaning products

• DuPont

• Then: black gun powder

• Now: polymer adhesives, insecticides, fire extinguishers, weatherization systems

Imitating other successful redesigns (continued)

What do they all have in common?

• Harnessing existing skill set to apply to new arena

• Acquiring new skills (via smaller companies, people, etc.) to make up for what is lacking

How is SWM doing this?

• Board members have experience in: manufacturing, M&A, capital allocation

• Acquisition of DelStar, Pronamic, and Smith & Nephew assets

If they don’t change the bottom line falls. If they do change, which they are, top

line grows. The question is, by how much?

What is the future value?

HISTORICAL REVENUES

 Average Growth (Decline)

RatesIndustry projections

Paper 0.17% 1%Reconstituted

Tobacco -4.63% -1.70%

Filtration 2933.33% 2.40%My Assumptions

 Conservative Expected Aggressive

Paper 0.50% 0.75% 1.00%Reconstituted

Tobacco -5.00% -4.50% -4.00%

Filtration 25% 30% 35%  2015 2016 2017 2018 2019

Conservative 820.10 854.30 850.11 846.31 842.90

Expected 828.57 874.67 936.04 1017.13 1123.74

Aggressive 837.03 895.69 975.73 1084.51 1231.98

2015 2016 2017 2018 2019 0

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Segments as a Percentage of Total Revenue Over Time

Reconstituted Tobacco Paper Filtration

What are the risks?• Can they diversify effectively?

• From tobacco healthcare?

• Is there enough demand in the filtration industry?

• Can they properly allocate funds to maintain a competitive advantage in both sectors?

• Will R&D increase significantly?

• 3,000 full time employees, 60 of which are in R&D

• 260 patents with 120 pending

• Refocus – but not much increase

• Will CF be more negative or more positive?

11 – 13On the Motley Fool Scale

?

Appendix 1: Current Pricing

Why the fall?

• Missed EPS consensus for Q1FY15 by 19.10% on May 6, 2015

• Expected: 0.89

• Actual: 0.72

Jan-0

8-15

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4-15

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1-15

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15

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-11-

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-15-

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-21-

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-28-

15

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9-15

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9-15

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37.00

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49.00

0

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Share Pricing in USD

NYSE:SWM - Share Pricing -Volume NYSE:SWM - Share Pricing

Market Cap: $1.18B

Appendix 2: Metrics that Matter

• P/BV = 3.16X

• Gross margins: 27 – 33%

• EBIT / Interest Expense = 15.6X

• ROA: 6.1%, ROC: 7.8%, ROE: 17.8%

• Capital Allocation FY2014:

• Business acquisitions: $32.6M

• Capital spending: $35.1M

• Share repurchase: $52.5M

• Dividends: $44.5M

Appendix 3: Updates on the Acquisitions

• Focus on seamless integration of Smith & Nephew and Pronamic to reduce cost inefficiencies

• Upgrading operations

• Adding personnel

• Slightly accretive to Q1FY15

• Launch of DelStar in Poland – startup costs = $0.5M in Q1FY15

• Acquisitions added $7.1M of net sales in Q1FY15

• Filtration Segment: 27.8% in the first quarter

• Compared to base business of 5.5% growth in Q1

Appendix 4: Income Statement2014 2013 2012

Net Sales $794.30 $772.80 $778.50Cost of products sold 575.5 520.1 519.0

Gross Profit 218.8 252.7 259.5

Selling expense 22.0 20.9 21.9Research expense 15.7 15.3 9.9General expense 61.9 50.3 54.6

Total nonmanufacturing expenses 99.6 86.5 86.4

Restructuring and impairment expense 13.1 41.3 21.4

Operating Profit 106.1 124.9 151.7Interest expense 7.2 2.9 3.3Other income (expense), net 9.3 5.7 1.2

Income from Continuing Operations before Income Taxes and Income from Equity Aff iliates 108.2 127.7 149.6

Provision for income taxes 20.5 53.0 49.5Income from equity aff iliates, net of income taxes 2.0 3.8 4.0

Income from Continuing Operations 89.7 78.5 104.1Loss from Discontinued Operations ($2.40) ($24.30)

Net Income $89.70 $76.10 $79.80

Net Income (Loss) per Share - Basic:Income per share from continuing operations $2.94 $2.51 $3.33Loss per share from discontinued operations ($0.08) ($0.79)

Net income per share basic $2.94 $2.43 $2.54

Net Income (Loss) per Share Diluted:Income per share from continuing operations $2.93 $2.49 $3.29Loss per share from discontinued operations ($0.07) ($0.78)

Net income per share diluted $2.93 $2.42 $2.51

Weighted Average Shares Outstanding:

Basic 30,238,000 31,056,700 30,986,200

Diluted 30,356,500 31,238,300 31,341,900

For the Years Ended December 31,

Appendix 5: Balance Sheet2014 2013

ASSETSCash and cash equivalents $290.30 $272.00Accounts receivable, net 93.9 107.6Inventories 108.4 132.8Income taxes receivable 11.5 9.9Current deferred income tax benefits 9.2 10.1Other current assets 6.1 4.7

Total Current Assets 519.4 537.1

Property, Plant and Equipment, net 362.0 393.2Investment in Equity Aff iliates 67.8 63.1Goodw ill 125.5 121.1Intangible Assets 89.3 80.7Other Assets 22.6 31.6

Total Assets $1,186.60 $1,226.80

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent debt $2.90 $4.20Accounts payable 44.8 49.4Accrued expenses 75.8 92.7

Total Current Liabilities 123.5 146.3

Long-Term Debt 437.2 381.2Pension and Other Postretirement Benefits 34.1 28.7Deferred Income Tax Liabilities 71.4 80.9Other Liabilities 31.4 28.3

Total Liabilities 697.6 665.4Stockholders' Equity:Preferred stock, $0.10 par value per share; 10,000,000 shares authorized; none issued or outstanding

Common stock, $0.10 par value per share; 100,000,000 shares authorized; 30,465,522 and 31,423,427 shares issued and outstanding at December 31, 2014 and 2013, respectively 3.0 3.1Additional paid-in-capital 49.8 43.3Retained earnings 512.7 520.0Accumulated other comprehensive loss ($76.50) ($5.00)

Total Stockholders' Equity 489.0 561.4

Total Liabilities and Stockholders' Equity $1,186.60 $1,226.80

Appendix 6: Cash Flows Statement 2,014 2,013 2,012

OperationsNet income $89.70 $76.10 $79.80Less: (Loss) income from discontinued operations ($2.40) ($24.30)

Income from continuing operations 89.7 78.5 104.1Non-cash items included in net income:Depreciation and amortization 45.1 37.3 38.5Impairment 37.2 20.2Deferred income tax provision (benefit) 3.3 17.3 13.1Pension and other postretirement benefits 1.2 1.1 1.0Stock-based compensation 5.9 3.2 6.9Income from equity aff iliates ($2.00) ($3.80) ($4.00)Excess tax benefits of stock-based aw ards ($0.60) ($0.50) ($1.40)Cash dividends received from equity aff iliates 4.4 3.7 3.0Other items 0.8 1.0 ($0.10)Changes in operating w orking capital:Accounts receivable 13.3 4.4 14.3Inventories 14.9 ($1.00) ($6.10)Prepaid expenses ($0.60) 0.1 ($1.00)Accounts payable 3.1 ($1.50) ($7.00)Accrued expenses ($8.00) 3.4 ($8.10)Accrued income taxes ($4.10) ($4.60) 4.7

Net changes in operating w orking capital 18.6 0.8 ($3.20)

Net cash provided (used) by operating activities of:- Continuing operations 166.4 175.8 178.1- Discontinued operations ($0.50) 2.3 ($3.50)

Cash Provided by Operations 165.9 178.1 174.6InvestingCapital spending ($35.10) ($29.10) ($27.20)Capitalized softw are costs ($1.00) ($0.50) ($0.90)Acquisitions, net of cash acquired ($32.60) ($229.70) Investment in equity aff iliates ($8.80) ($21.00)Other investing 3.0 5.6 ($2.60)

Cash Used for Investing ($74.50) ($253.70) ($51.70)FinancingCash dividends paid to SWM stockholders ($44.50) ($39.50) ($14.10)Changes in short-term debt ($0.40) ($1.90)Proceeds from issuances of long-term debt 228.3 455.6 43.0Payments on long-term debt ($170.60) ($228.10) ($31.80)Purchases of common stock ($52.50) ($1.70) ($50.00)Excess tax benefits of stock-based aw ards 0.6 0.5 1.4Proceeds from exercise of stock options 0.5 2.8

Cash (Used in) Provided by Financing ($39.10) 187.3 ($50.60)Effect of Exchange Rate Changes on Cash and Cash Equivalents ($34.00) 9.1 2.4

Increase in Cash and Cash Equivalents 18.3 120.8 74.7Cash and Cash Equivalents at beginning of period 272.0 151.2 76.5

Cash and Cash Equivalents at end of period $290.30 $272.00 $151.20